America the Uncompetitive
Tuesday, August 19th, 2008The new international tax rankings are out for 2008, and congratulations to Washington, D.C., are again in order. Our political class has managed to maintain America’s rank with the second highest corporate tax rate in the world at 39.3% (average combined federal and state).
Only Japan is slightly higheroverall, though if you are silly enough to base a corporation in California, Iowa, New Jersey, Pennsylvania, or other states with high corporate levies, your tax rate on business income is even higher than in Tokyo. For the first time, the U.S. statutory rate is now 50% higher than the average of our international competitors, continuing a long-term trend as the rest of the world keeps reducing corporate tax rates. (See nearby chart).
Economists argue over how much this tax penalty on corporate profits injures U.S. competitiveness and drives capital overseas. We’ve long believed that it hurts a lot. And now even the folks at the Paris-based Organization for Economic Cooperation and Development (OECD) say they agree.
The Wall Street Journal
I have brought this up several times in the past and it honestly surprises me with how pro business the Bush Administration has been this rate was never cut here in the U.S. It’s astonishing to me that even the Socialists in Europe have figured out something long ago that our own alleged Capitalist government cannot. Corporate tax rates hurt competitiveness. I suppose I shouldn’t be surprised, though, when we have populist Congress critters running around the country preaching about sticking it to big business.
In Washington, meanwhile, the politicians are still living in their own populist alternative universe. Last week Senator Byron Dorgan of North Dakota waved around a new politically generated study by the Government Accountability Office (GAO) finding that 28% of large U.S. corporations paid no income tax in 2005. “It’s time for big corporations to pay their fair share,” Mr. Dorgan roared.
Well, the Tax Foundation looked at those numbers and found that, among the large companies that paid no taxes, 85% of them also made no profits that year. American Airlines and General Motors escaped income tax for 2005 through the clever tax dodge of losing $862 million and $10.5 billion, respectively. How unpatriotic.
Everyone in this country is constantly complaining about how jobs are moving offshore, well is it any wonder why? Why would a multi-national corporation continue to keep operations in the U.S. when they can move it to Ireland and pay a fraction of the taxes they are paying here? There would be no logic to it. And was proven with the tax cuts on personal income implemented by Kennedy, Reagan, and Bush 43, we have seen that cutting rates reaps more rewards. Example Europe:
The average European nation has tax rates on corporate income 10 percentage points lower than the U.S., but those countries on average raise 50% more as a share of GDP in corporate taxes than does the U.S., according to a 2007 study by the Treasury Department. Ireland with its 12.5% rate captures a higher share of its GDP (3.4%) in corporate taxes than the U.S. does (2.5%) with its 39.3% rate.
So where do McCain and Obama stand on this issue?
To correct this revenue dearth, Barack Obama and Democrats in Congress are proposing to pry more tax money out of U.S. companies that have profitable affiliates outside the U.S. Mr. Obama is also shamelessly taking the Byron Dorgan line that the problem is venal U.S. CEOs rather than the nutty U.S. tax code.
One proposal would tax foreign profits when they are earned, rather than waiting until the dollars are brought back to the U.S. This may raise more revenue in the short term, but it would also accelerate the trend of U.S. companies moving entirely offshore, or being bought out by Asians and Europeans so they can escape onerous U.S. taxes.
John McCain has proposed cutting the 35% federal corporate tax rate to 25%. That’s a good start, but even that would leave the U.S. with a combined state and federal rate nearly five percentage points above the global average. With corporate tax rates falling around the world, and with its damage to investment increasingly obvious, abolishing the U.S. corporate income tax should be on the table. Senator Jim DeMint of South Carolina and Congressman Paul Ryan of Wisconsin have proposed replacing the corporate tax with a value-added consumption tax. We worry about a VAT turning into a runaway money machine for government, but something has to give on the corporate tax.
Every month that goes by without tax reform, America is a relatively less attractive place to do business. Over the past 18 months, nine of the 30 most developed nations and 20 countries world-wide — from Israel to Germany to Turkey — have cut their corporate tax rates. Nations are slashing rates to attract capital and jobs from the U.S., and the tragedy is that our politicians keep making it easy for them.
I don’t know that I’m on board with a VAT tax for the reasons the Tax Foundations cite, but I wouldn’t be completely opposed to the idea if the government made substantial spending cuts.
The bottom line is that if you want to know why manufacturing and other industries in this country has gone the way of the dodo look no farther than your own Congressmen.